Tight liquidity forces Indian NBFCs to look overseas

Mumbai: Non-banking financial companies are looking at offshore bonds to raise funds as liquidity conditions remain tight in India. The move also helps them diversify their funding profile in line with regulatory guidance.

Since the beginning of 2024, NBFCs such as REC, Bajaj Finance, Shriram Finance, Piramal Capital & Housing, Muthoot Microfin, L&T Finance, HDFC Credila, and Cholamandalam Investment & Finance have raised funds overseas in multiple tranches.

Further, Manappuram Finance, Bajaj Finance, Tata Motors Finance and L&T Finance, among others, either have board approvals or are looking to raise funds via external commercial borrowings (ECB) in the coming weeks, according to market participants.

Raised risk weights

The initial round of overseas fundraising started after the Reserve Bank of India (RBI) raised risk weights for bank lending to NBFCs in November 2023, leading to an increase in borrowing costs for the latter.

Following that, crowding in the domestic bond market—led by strong credit demand and rising fund requirements of lenders—has driven more and more non-bank lenders to tap offshore investments despite them being more expensive.

Also read |  Piramal Capital aims for 10-15% overseas funding in 2-2.5 years: MD Sridharan

“Higher risk weights have made bank funding more challenging for NBFCs, pushing them toward domestic bond markets, reflected in the surge in tier-I and tier-II bond issues. Given this shift, NBFCs are now exploring offshore funding options as the next viable strategy for diversification, even if it comes at a slightly higher cost," said Venkatkrishnan Srinivasan, a bond market expert and founder and managing partner of Rockfort Fincap, a boutique financial advisory firm.

“The key priority is ensuring they can secure the necessary capital to continue operations and growth, which makes the higher pricing an acceptable trade-off at this stage," he said, adding that NBFCs are also reluctant to keep going back to domestic bond markets repeatedly due to increased bond supply or investors' exposure limits being hit.

Market gold rush

The rise in domestic issuances is also because even deposit-taking NBFCs are choosing to borrow more from the market given the shrinking margin between market and deposit rates as NBFCs have to compete with banks to offer high deposit rates.

Post the Q1 results, Shriram Finance MD and CEO Y.S. Chakravarti had told Mint that average cost of funds for the quarter was 8.96%, of which cost of retail deposits was 8.69%. The NBFC will continue to raise funds overseas via offshore bonds and development finance institutions through FY25, he had then said.

Also read |  RBI tightens liquidity norms for mortgage lenders, puts them at par with NBFCs

While US Fed rate cuts haven’t panned out as expected, domestic borrowing has also become very expensive given elevated rates and higher borrowing by banks and NBFCs across the board.

On the other hand, global banks are offering extremely fine pricing for hedging costs as competition rises, making overseas borrowing even more attractive, another expert said on the condition of anonymity.

Warnings' effect

RBI’s multiple warnings to NBFCs, with respect to concentration in their funding profiles, are also pushing such lenders to look at alternative funding avenues to diversify their borrowing profile, industry experts said.

“You have to assume a certain part of your liability stack is going to be higher priced compared to others, but we would prefer to keep a steady pipeline there so that in good times and bad we have access to capital," Piramal Capital and Housing MD Jairam Sridharan had told Mint when the company raised $300 million through its maiden offshore bond in July 2024.

“It’s an insurance policy to ensure that we don’t fall short at any point in time," Sridharan had said. The lender will raise another $100-200 million through a second tranche in the next 3-4 months, and eventually increase the share of overseas borrowing to 10-15% of total liabilities in 2-2.5 years.

Also read | RBI says depositors can seek premature withdrawal of NBFC deposits. Details here

Earlier this month, ICRA in a note said NBFCs are expected to witness “headwinds related to funding availability", which in turn could lead credit/loan growth to ease to 13-15% in FY25 from 18% in FY24.

“Key challenges for meeting growth expectations, however, would be in accessing the required debt funding over and above the refinancing of existing debt. The estimated incremental debt funding for AUM expansion is ₹5.6-6 trillion for FY25," it said.

Incremental direct bank credit to NBFCs in Q1 FY25 fell to ₹7,500 crore from ₹92,000 crore in Q1 FY24. As a result of slowing bank funding and push for diversifying their borrowing profile, NBFCs’ weighted average cost of funds is projected to increase by 20-40 bps over FY24 levels, as per ICRA.

Indian corporates’ fund raising via dollar bonds had touched a 14-year low in 2023 as elevated yields globally encouraged borrowers to instead opt for foreign currency loans.